February 27 2017
Money/Retirement/Saving Money

Investors Fighting Back as a New Era of Unregulated Greed Unfolds

wall street greed index fundsAs you may have noticed, the news is pretty crazy right now.  The volume is ear-splitting and we only have so much bandwidth.  A lot of important stories are eluding notice.  One thing you might not have heard about is the pretty fundamental shift that’s taking place right now in the way people are investing their money.

As Congress works to erase Dodd-Frank, investors are wising up and shielding their money from Wall Street molestation by putting it into low cost index funds.

Like, in droves.

Moody’s issued a report this month that says within the next four to seven years, more than half the assets in the investment management business will be in index funds, rather than actively managed funds.  This is a pretty monumental shift.  What is the root of this financial awakening? It all starts with retirement.

Most average investors have the bulk of their investments in retirement savings.

Many are not particularly pro-active when it comes to managing their nest egg.  If they have a 401K, they don’t look at it.  Or they allow retirement advisors to mange their IRA.  Ordinary investors who aren’t particularly savvy or don’t pay very close attention were about to receive some protection from financial chicanery thanks to the Obama-era fiduciary rule, which would have required financial professionals to put their clients’ best interests first when giving advice on retirement investments.

Wait, this wasn’t already what financial advisors were supposed to be doing, you say?!

Nope.  Wall Street makes money by preying on unsophisticated investors and selling them crappy, expensive products. They earn money from commissions, which they get whether your investment wins or loses.  And it’s not all just handsome Dicaprio-esque brokers selling penny stocks. Your boring, not-at-all-handsome account rep at Fidelity trying to sell you that annuity could be just as big a thief. The fiduciary rule was intended to prevent conflicts of interest, thus protecting people’s crucial retirement savings from Wall Street’s inherent greed.

But we know how the White House and Congress view conflicts of interest.

“Yawn!”  So on February 3rd, the president signed a memorandum, much sought-after by Republicans in Congress, that instructs the Labor Department to delay the fiduciary rule, which was supposed to go into effect in April.  Trump’s National Economic Council director (and former Goldman Sachs President, because irony will never die), Gary Cohn, said that the fiduciary requirement “limits investor choice” and he compared it to a menu with “only healthy food.”

Which is an interesting perspective, given that most investors would probably choose to put their retirement savings into a chopped salad, rather than, say, an Arby’s “Meat Mountain,” if they they understood that this was a choice that were supposed to be actively making.

fiduciary rule healthy menu

The problem is that the least savvy investors do not understand this.

They need the fiduciary rule.  If a Wall Street millionaire wants to eat a room temperature Clams Casino hedge fund from the deli, what’s to stop her, Gary Cohn? Certainly not the fiduciary rule… it doesn’t stop those who wish to take financial risks from doing so.  It protects the retirement accounts of inexperienced investors.

Every major news outlet is on record in support of the fiduciary rule, including the Wall Street Journal.  Yet, its fate remains in question while Congress focuses on protecting profits at Goldman Sachs, the former employer of seemingly half our current government, rather than consumers or small investors.

So how does the little guy invest in the era of unregulated greed?

Here’s the good news… tell your grandma.  It’s as simple as ever.  The average person may think that if they don’t know what a credit default swap is (even after watching The Big Short), they had best put their money into the hands of professionals.  But it’s not true. I fell into the trap of never looking at my 401K and I’m educated, generally savvy and endowed with my fair share of common sense.  I assumed that it was all taken care of, with the best possible outcome assured.

But after reading this excellent Forbes article by John Wasik, I finally looked at my 401K last year, and realized that I was being robbed blind.  Once I realized that I, like many people, suffered from crappy 401K syndrome, I told my employer they should get a new a one that offered index funds, which perform better and have lower fees.  They are the literal definition of  a “no-brainer.”  When this change did not materialize, I rolled my money over into an IRA. I manage the money myself and it is growing much faster now.

“Trump Can’t Stop the Retirement Revolution” -Bloomberg News

“Investors yanked $340 billion from actively managed funds last year, according to Morningstar, and poured $505 billion into index and exchange-traded funds, which typically cost far less and come without added sales fees,” says this recent Bloomberg Businessweek story. It is an excellent read and shows why, nevertheless, we still need the fiduciary rule to protect novices and vulnerable investors, such as the elderly.  The good news is that, because irony never dies, the fiduciary rule’s potential extinction has generated lots of news stories like the one above, and educated many people about the superiority of index funds over managed funds.

Even Warren Buffet will tell anyone who will listen to just put their money in the S&P.

He is a vocal critic of Wall Street’s high fees and in his shareholder letter out this month he says:

Over the years, I’ve often been asked for investment advice… My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion…However, none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them… Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate.

There you have it.  People are obsessed with listening to Warren Buffet, and that is probably a good thing.  Thanks to the (failing) mainstream news and business media, and gurus like Warren Buffet, investors large and small are getting the message about this simple investing wisdom. And they are adjusting their portfolios accordingly.

Incidentally, my employer… finally… months after I rolled over my 401K, got around to switching our plan to one that includes a low cost S&P fund.  You’re welcome, co-workers. Speak up if your 401K is garbage!  If my little company was finally able to fix our 401K situation, then I promise you, any company can.  The more employees that make this demand, the closer these greedy retirement scams will be to extinction.

Congress will not put your interests above Wall Street’s anytime soon.  Unfortunately, Wall Street is a lot better at occupying the White House than the people are at occupying Wall Street.  So be vigilant and look out for yourself.  When laws are written by corporations, voting with your wallet really is all you can do sometimes.

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  • Excellent post, Linda! The whole thing is super frustrating. We were almost taken in our 20s by an adviser with only his own interests in mind. Thankfully, we were wary, did our homework and walked away unscathed. (He wanted us to buy a universal life insurance policy to fund our child’s college !???? When asked what his commission would be he refused to answer.) But the next person may not walk away unharmed. Your advice to “look out for yourself” is spot on. No one cares about your money more than you do.

    • That’s outrageous. It is really awful because I am educated and have my wits about me – as are you. The people that get taken to the cleaners are the elderly, or people who just are not sophisticated or confident about investing. The people who most need to be made aware of these things are not getting the message. This is why we need laws to protect vulnerable people. Thanks Amanda!

  • Linda, I have to take a somewhat opposite position here. While I agree some advisors are out to get you and you need to watch out for yourself, I’m not sure I agree the fiduiciary rule is the solution. The issue is how vague it is written. If I offer you Schwab index fund and vanguard is cheaper, have I violated my duty? If I offer you a active fund instead of an index fund have I? Can a medium size company be sued based on their offerings (legitimately or not). This is all before the purely selfish reason that can be applied for people who really know how to invest. People who don’t look out for their money subsidize your investing. I’ve already seen the impacts here as my mom’s 401k has added a fee. The fee is to make up for the reduction in fund kick backs caused by switching to lower cost funds to meet the letter of the law. IE the impact of this change is she will now pay .2% more per year because people who do not understand no longer have the option to buy a fund with a 1% fee. I’m not saying thats a reason to be against it, but remember no change is without unintended consequences and not all of those consequences are born by the people on wall street. I believe this one needs to go in for a more thorough analysis and a more well defined solution.

    • Thanks FTF, I appreciate your perspective. Maybe the solution is for the rule to be written better, rather than not exist at all. I think protecting the elderly or unsophisticated from being sold expensive financial products, whose sole purpose is to benefit the broker, is an unimpugnable idea. Should it be carried out correctly by people who understand the issue and can convey it correctly? Sure. Is there a reason you offered me the slightly more expensive Schwab index fund, rather than the Vanguard fund? Do you believe the Vanguard fund is better for some reason? If not, then why am I paying you to buy me the more expensive fund, even if it is only slightly so? When I get a haircut, I assume the person is licensed to cut hair. If I am paying a financial professional, I assume they make money by helping me make money, not foremost by selling me fees. Obviously no one has a crystal ball, any investment can under-perform. But I think there’s a difference between advising me to invest in an active fund instead of an index fund because your financial expertise tells you that it is going to perform better, and selling me something questionable for the purpose of making out on the fee. I understand that there are real world consequences that make laws more complicated than meets the eye, but if you believe in the underlying idea, there is always a way to do it correctly. Obviously, I can’t write the law. But that’s not my job. My job is to think without limitation about how the world should be. We need some people who do that, who view the world not through the lens of “the economy” but through the lens of the vulnerable. Otherwise there is always one economic argument or another for not protecting people.

  • I know that I got a call from my broker saying that my IRAs would have to move to a new range of options: self directed, robo-managed, or fee-transparent. (i inherited his services from my mom, and find him good if expensive.) I’m kinda glad, it will make it much easier to move everything to Vanguard (where I’ve had an account for a while.)

    I am a bit concerned that eventually index funds may cause some distortions. If you own everything proportionately, then good performance isn’t recognized by stock prices. But I guess institutional investors will never not try to outpace the market, even if their performance is mostly a matter of random chance.

    • Obviously people have made lots of money making bets on particular companies and sectors. That will never change, and there will always be money in those places. I also think that the insane growth we have seen the S&P cannot go on forever and eventually, it is not going to look quite as exciting as it has over the last almost decade. But there is no question it is where most of your money should be. (Says someone who does not work in finance and has no particular credentials lol!)

  • I’ll share some random thoughts on all of this. 🙂 In my experience, dealing with literally thousands of investors, I would say that the vast majority of people regardless of age, are not proactive with their savings/investments. That would almost be an understatement, in fact. People are much more savvy with borrowing products, such as mortgages and car loans. And while many still make poor decisions and overspend, they will still endure months of research to become familiar with terminology, mortgage options (as an example), they’ll know and understand every rate and offer on the street.
    Those same people will hand their life savings over, no questions asked, without any understanding as to how their advisor is being compensated, and what it means in terms of dollars and cents to them.
    I think part of it is because a house, or a car, is a tangible thing. People can relate to it because they live in it, they drive it everyday. Investments are almost virtual, just numbers on a computer screen or statement.
    One of the biggest mistakes people make is giving their money to a family friend to manage. I’ve seen so many people getting ripped off by planners, yet even when they are made aware that they are being fleeced for thousands of additional dollars in fees/commissions on an annual basis, they feel bound to the advisor because or a personal relationship. So they continue to get hosed. It’s very, very common. So many of these advisors have built their businesses by bringing on family members and friends, and so on. Almost like a pyramid scheme. Anyways…I could go on and on and on…:)

    • That’s such a good point about how borrowing money is something people understand, because they understand the ultimate object they are getting, whereas just investing is so much less tangible. We think of financial advisors like doctors – we won’t question them, we assume they know all kinds of things we cannot know. But of course, even doctors can interpret things incorrectly. It’s never wise to abdicate all responsibility for decision making about the important things in life…

  • So well put, Linda! It’s really sad how undereducated most of the country is when it comes to finances.

    Warren Buffet’s $1 million bet (that an index find could beat any active fund manager willing to take the bet) is coming due soon and he’s going to win barring some strange turn of events. I’m hopeful this brings a lot more people in the loop when it gets covered in the news.

    I’m with you – the fiduciary rule does nothing but good and it’d be sad to see it go away.

    • I think that a lot of things are lining up that are leading more people to this realization, even those of us who are less sophisticated, thus the huge trend of a movement of money into index funds. People pay attention to Warren Buffet, plus you have the somewhat publicized controversy surrounding the fiduciary rule, and not to mention the impossible to ignore, almost ludicrous, gains the S&P has had over the last few years. I really don’t think those kinds of gains will go on forever without any pause, but I am still keeping all my long term investments there, relatively safe and sound.

  • What a depressingly true post! Here’s our problem. We naturally look to government to protect the little guy and common decency. But government is too easily corrupted by the wealthy and the organized, and these two special interests aren’t always concerned about the little guy and common decency. So what do we do? We fight the good fight, but never fail to recognize that it’s up to the individual to truly look after his or hers best interests. Bravo, Linda. Low-cost index funds are your best friend. And start loading up on cash. When the next correction comes, you’ll be set to make a killing.

    • I agree with you for the most part. I think where we diverge slightly is here: the market has an inherent incentive to cheat people, if it can. The government may not be perfect, but it is the only institution we have that can attempt to protect people, as crappy a job as it often does, given that it’s legal to accept bribes from bankers. But at the end of the day, I can’t vote for the banker, I can only vote for the pol. As corruptible as government is, it is our only line of defense against greed run amok. So in my deranged Polly Anna state, I am going to root for the government to succeed rather than nothing at all. In a perfect world, the government keeps market forces in check so that powerful corporations do not infringe on our rights or threaten our safety or the environment. I grant you, this is not a perfect world. But my values are the same no matter how rotted the insides of some in government may be.

  • I’m so glad to hear that others are also upset about changes regarding the fiduciary rule. As someone who came from an economic class where financial savvy was not taught, I think the fiduciary rule is an important protection. Great article!

    • Thank you Melanie. I actually find it surprising how many people take an opposing view on this one. I understand there’s a lot of gray in life, but sometimes you need to just be a little black and white.

    1. Melanie of Mindfully Spent 08:51pm 08 March - 2017 - Reply

      I’m so glad to hear that others are also upset about changes regarding the fiduciary rule. As someone who came from an economic class where financial savvy was not taught, I think the fiduciary rule is an important protection. Great article!

      • Brooklyn Bread 08:54pm 08 March - 2017 - Reply

        Thank you Melanie. I actually find it surprising how many people take an opposing view on this one. I understand there’s a lot of gray in life, but sometimes you need to just be a little black and white.

    2. Mr. Groovy 09:28am 06 March - 2017 - Reply

      What a depressingly true post! Here’s our problem. We naturally look to government to protect the little guy and common decency. But government is too easily corrupted by the wealthy and the organized, and these two special interests aren’t always concerned about the little guy and common decency. So what do we do? We fight the good fight, but never fail to recognize that it’s up to the individual to truly look after his or hers best interests. Bravo, Linda. Low-cost index funds are your best friend. And start loading up on cash. When the next correction comes, you’ll be set to make a killing.

      • Brooklyn Bread 10:46am 06 March - 2017 - Reply

        I agree with you for the most part. I think where we diverge slightly is here: the market has an inherent incentive to cheat people, if it can. The government may not be perfect, but it is the only institution we have that can attempt to protect people, as crappy a job as it often does, given that it’s legal to accept bribes from bankers. But at the end of the day, I can’t vote for the banker, I can only vote for the pol. As corruptible as government is, it is our only line of defense against greed run amok. So in my deranged Polly Anna state, I am going to root for the government to succeed rather than nothing at all. In a perfect world, the government keeps market forces in check so that powerful corporations do not infringe on our rights or threaten our safety or the environment. I grant you, this is not a perfect world. But my values are the same no matter how rotted the insides of some in government may be.

    3. Chris @ Keep Thrifty 10:48pm 02 March - 2017 - Reply

      So well put, Linda! It’s really sad how undereducated most of the country is when it comes to finances.

      Warren Buffet’s $1 million bet (that an index find could beat any active fund manager willing to take the bet) is coming due soon and he’s going to win barring some strange turn of events. I’m hopeful this brings a lot more people in the loop when it gets covered in the news.

      I’m with you – the fiduciary rule does nothing but good and it’d be sad to see it go away.

      • Brooklyn Bread 10:26am 03 March - 2017 - Reply

        I think that a lot of things are lining up that are leading more people to this realization, even those of us who are less sophisticated, thus the huge trend of a movement of money into index funds. People pay attention to Warren Buffet, plus you have the somewhat publicized controversy surrounding the fiduciary rule, and not to mention the impossible to ignore, almost ludicrous, gains the S&P has had over the last few years. I really don’t think those kinds of gains will go on forever without any pause, but I am still keeping all my long term investments there, relatively safe and sound.

    4. Mystery Money Man 01:18am 02 March - 2017 - Reply

      I’ll share some random thoughts on all of this. 🙂 In my experience, dealing with literally thousands of investors, I would say that the vast majority of people regardless of age, are not proactive with their savings/investments. That would almost be an understatement, in fact. People are much more savvy with borrowing products, such as mortgages and car loans. And while many still make poor decisions and overspend, they will still endure months of research to become familiar with terminology, mortgage options (as an example), they’ll know and understand every rate and offer on the street.
      Those same people will hand their life savings over, no questions asked, without any understanding as to how their advisor is being compensated, and what it means in terms of dollars and cents to them.
      I think part of it is because a house, or a car, is a tangible thing. People can relate to it because they live in it, they drive it everyday. Investments are almost virtual, just numbers on a computer screen or statement.
      One of the biggest mistakes people make is giving their money to a family friend to manage. I’ve seen so many people getting ripped off by planners, yet even when they are made aware that they are being fleeced for thousands of additional dollars in fees/commissions on an annual basis, they feel bound to the advisor because or a personal relationship. So they continue to get hosed. It’s very, very common. So many of these advisors have built their businesses by bringing on family members and friends, and so on. Almost like a pyramid scheme. Anyways…I could go on and on and on…:)

      • Brooklyn Bread 07:46am 02 March - 2017 - Reply

        That’s such a good point about how borrowing money is something people understand, because they understand the ultimate object they are getting, whereas just investing is so much less tangible. We think of financial advisors like doctors – we won’t question them, we assume they know all kinds of things we cannot know. But of course, even doctors can interpret things incorrectly. It’s never wise to abdicate all responsibility for decision making about the important things in life…

    5. Emily @ JohnJaneDoe 07:47am 01 March - 2017 - Reply

      I know that I got a call from my broker saying that my IRAs would have to move to a new range of options: self directed, robo-managed, or fee-transparent. (i inherited his services from my mom, and find him good if expensive.) I’m kinda glad, it will make it much easier to move everything to Vanguard (where I’ve had an account for a while.)

      I am a bit concerned that eventually index funds may cause some distortions. If you own everything proportionately, then good performance isn’t recognized by stock prices. But I guess institutional investors will never not try to outpace the market, even if their performance is mostly a matter of random chance.

      • Brooklyn Bread 09:46am 01 March - 2017 - Reply

        Obviously people have made lots of money making bets on particular companies and sectors. That will never change, and there will always be money in those places. I also think that the insane growth we have seen the S&P cannot go on forever and eventually, it is not going to look quite as exciting as it has over the last almost decade. But there is no question it is where most of your money should be. (Says someone who does not work in finance and has no particular credentials lol!)

    6. Full Time Finance 08:57pm 28 February - 2017 - Reply

      Linda, I have to take a somewhat opposite position here. While I agree some advisors are out to get you and you need to watch out for yourself, I’m not sure I agree the fiduiciary rule is the solution. The issue is how vague it is written. If I offer you Schwab index fund and vanguard is cheaper, have I violated my duty? If I offer you a active fund instead of an index fund have I? Can a medium size company be sued based on their offerings (legitimately or not). This is all before the purely selfish reason that can be applied for people who really know how to invest. People who don’t look out for their money subsidize your investing. I’ve already seen the impacts here as my mom’s 401k has added a fee. The fee is to make up for the reduction in fund kick backs caused by switching to lower cost funds to meet the letter of the law. IE the impact of this change is she will now pay .2% more per year because people who do not understand no longer have the option to buy a fund with a 1% fee. I’m not saying thats a reason to be against it, but remember no change is without unintended consequences and not all of those consequences are born by the people on wall street. I believe this one needs to go in for a more thorough analysis and a more well defined solution.

      • Brooklyn Bread 09:41am 01 March - 2017 - Reply

        Thanks FTF, I appreciate your perspective. Maybe the solution is for the rule to be written better, rather than not exist at all. I think protecting the elderly or unsophisticated from being sold expensive financial products, whose sole purpose is to benefit the broker, is an unimpugnable idea. Should it be carried out correctly by people who understand the issue and can convey it correctly? Sure. Is there a reason you offered me the slightly more expensive Schwab index fund, rather than the Vanguard fund? Do you believe the Vanguard fund is better for some reason? If not, then why am I paying you to buy me the more expensive fund, even if it is only slightly so? When I get a haircut, I assume the person is licensed to cut hair. If I am paying a financial professional, I assume they make money by helping me make money, not foremost by selling me fees. Obviously no one has a crystal ball, any investment can under-perform. But I think there’s a difference between advising me to invest in an active fund instead of an index fund because your financial expertise tells you that it is going to perform better, and selling me something questionable for the purpose of making out on the fee. I understand that there are real world consequences that make laws more complicated than meets the eye, but if you believe in the underlying idea, there is always a way to do it correctly. Obviously, I can’t write the law. But that’s not my job. My job is to think without limitation about how the world should be. We need some people who do that, who view the world not through the lens of “the economy” but through the lens of the vulnerable. Otherwise there is always one economic argument or another for not protecting people.

    7. Amanda @ centsiblyrich 10:35am 28 February - 2017 - Reply

      Excellent post, Linda! The whole thing is super frustrating. We were almost taken in our 20s by an adviser with only his own interests in mind. Thankfully, we were wary, did our homework and walked away unscathed. (He wanted us to buy a universal life insurance policy to fund our child’s college !???? When asked what his commission would be he refused to answer.) But the next person may not walk away unharmed. Your advice to “look out for yourself” is spot on. No one cares about your money more than you do.

      • Brooklyn Bread 01:33pm 28 February - 2017 - Reply

        That’s outrageous. It is really awful because I am educated and have my wits about me – as are you. The people that get taken to the cleaners are the elderly, or people who just are not sophisticated or confident about investing. The people who most need to be made aware of these things are not getting the message. This is why we need laws to protect vulnerable people. Thanks Amanda!

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